The Billion Dollar Esports Business

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Hey Friends,

Driven by higher demand from the pandemic, esports are having their moment.

FaZe Clan, an esports organization that operates more like an online gaming, content, entertainment, and merchandise business, announced yesterday that they are going public through a merger with B. Riley Principal 150 Merger Corp., a special purpose acquisition company or SPAC.

The interesting part? The deal values FaZe Clan at $1 billion, up significantly from the $305 million that Forbes valued the business at last year, and makes them the first esports organization to reach a billion-dollar valuation.

Assuming no redemptions—SPAC investors have the right to withdraw their money before a merger is completed—FaZe Clan is expected to raise roughly $300 million in cash from the deal.

Shares of the SPAC rose 15% to $11.19 Monday.

Founded in 2010, FaZe Clan made their name for innovating trickshotting in the popular video game Call of Duty: Modern Warfare 2. Essentially, they were the Harlem Globetrotters, jumping off buildings and shooting someone on the way down.

The content exploded, and within two years, the original members had over 2 million subscribers on YouTube and were earning thousands of dollars on each video.

But they aren’t really a traditional esports organization. Sure, they still play competitive video games for money, but after the boom & bust of venture capital flows over the last 5 to 7 years, investors demanded that these companies build out diversified cash flows.

So, today, the popular esports brand earns roughly 20% of their revenue from competitive gaming, and the rest of their cash comes from a combination of branded content, licensing deals, merchandise, and an influencer marketing agency that they own & operate.

For context, CEO Lee Trink once described FaZe Clan as “the Dallas cowboys meets Supreme meets MTV.” Maybe that helps, or perhaps it confuses you even more.

But here’s the problem — the $1 billion valuation is surprising.

It’s true that the organization has more than 350 million followers across all social media platforms. They currently have 85 full-time employees, and they have done deals with brands like McDonald’s, Doritos, and DC Comics. Heck, FaZe Clan was even the first esports organization to be featured on the cover of Sports Illustrated.

Still, these esports organizations are notoriously tricky to value. It’s more of an art than a science, and truthfully, using a SPAC to go public only makes it more confusing.

There is an occasional premium placed on geographic location, but the average professional sports team in North America (NFL, NBA, MLB, NHL) typically trades hands at a 6x revenue multiple. If you told me FaZe Clan should trade at a higher multiple than that, I buy it. They have more asymmetric revenue upside and also have the opportunity to become a truly global brand.

But the company is expected to bring in $50 million in revenue this year, up from $40 million last year, and is being valued at $1 billion. That’s a 20x revenue multiple.

Average Revenue Multiple (2020 Data)

• Sports Franchises: ~6x revenue

• Software Companies: ~12x revenue

• FaZe Clan: ~20x revenue

The example I used yesterday on Twitter was Barstool Sports, a profitable company doing $100 million in revenue when they were acquired by Penn National Gaming in a $450 million deal last year.

One might argue that they are different business models and shouldn’t be used as comps. I get it, but are they really that different? FaZe Clan is essentially a multi-faceted entertainment conglomerate that also happens to play competitive video games. Barstool is very similar in my mind.

Now, to be clear, I’m happy for FaZe Clan, its founders, employees, and their fans. It’s an incredible achievement to build a billion-dollar company, and it’s even more impressive when you become the first organization in your industry to do it.

The market ultimately decides what a business is worth, and today, it believes FaZe Clan is worth $1 billion. Of course, tomorrow is a different story, and we’ll see how that goes, but just because I think it’s an aggressive multiple today doesn’t mean the company won’t be worth much more in the long run.

I hope everyone has a great day, and we’ll talk tomorrow.

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Huddle Up is a daily letter that breaks down the business and money behind sports.

Join more than 49,000 professional athletes, business executives, and casual sports fans that receive it directly in their inbox each morning — it’s free.